RDP 8709: A Note on Aggregate Investment in Australia 6. Conclusion

This study has attempted to explain aggregate investment in Australia by using a combination of the q theory and profits theory of investment behaviour. It is novel in attempting to incorporate competing hypotheses directly into the specification of the problem rather than testing one hypothesis with the alternative implicit in the rejection of the null hypothesis. It also explicitly incorporates the theoretical derivation of the model into the construction of the data used to test the theory. It is found that ignoring this implication of the theoretical model biases the test of the q theory towards rejection.

We find that the model explains a large part of the variation in aggregate investment. Future work should focus on incorporating liquidity constraints explicitly into the firm's optimisation problem. It should also be based on a broader measure of the firm's incentive to invest taking into account both debt and equity sources of financing investment.